Startups Should Be Treated Equally Under the CARES Act

An Open Letter to the Small Business Administration

Dear Administrator Carranza:

Thank you for your ongoing efforts to support America’s small businesses navigate through the economic crisis caused by the coronavirus pandemic.

We write to you to urge the Small Business Association (SBA) to expeditiously clarify that “affiliation rules” do not apply to venture capital-backed technology startups under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Doing so will help ensure that these small businesses do not run into unnecessary delays in obtaining much-needed loans that have been authorized as part of this law.

The economic crisis unleashed by the coronavirus pandemic has put the entire nationwide tech startup ecosystem in jeopardy. Scores of successful companies have seen revenues collapse and have had to furlough workers and cut salaries. We are encouraged that Congress has passed the CARES Act to provide needed relief to individuals and businesses during this crisis; its small business provisions are likely to help many enterprises with 500 or fewer employees in a given location get through this troubling time. Unfortunately, SBA’s “affiliation” rule could potentially block certain venture-backed companies from being able to apply for small business loans, especially where a single venture capital firm may have a 20% or higher ownership stake.

As House Speaker Nancy Pelosi has pointed out, Congress did not intend to effectively block some of the most innovative companies across the country from being part of the small business support efforts.

Unlike traditional private equity buy-out funds, venture capitalists (VCs) typically act as minority investors in early-stage companies. VCs act as both capital providers and advisors to entrepreneurs and their businesses. They do not control operational activities or day-to-day decision making, and at best have one seat on the Board of Directors. While a typical VC portfolio could contain several companies that collectively have more than 500 employees, the nature of VCs’ relationships with their portfolio companies is fairly hands-off. Given limited ownership and control dynamics between VCs and their portfolio companies, affiliations rules are clearly not applicable here.

While some may perceive that all venture-backed companies are well capitalized, many of our businesses are suffering terribly from the recession, and like other small businesses, need financial support during this crisis. In fact, some of the largest and “most successful” startups have already laid off scores of their workforce in order to survive. Venture-backed companies employ millions of people across the country, often in locations one does not normally think about. They are responsible for some of the most forward-looking innovation produced in the U.S. economy.

We hope that the SBA is able to provide clarity by completely removing VC-related affiliation rules from consideration in the current environment. Additionally, we hope that members of Congress who worked on the small business portion of the CARES Act will likewise continue to voice public support for VC-backed companies’ ability to be part of the small business loan program.

Thank you for your consideration and support.

Signed:

George Arison, Co-Founder and Co-CEO, Shift

Toby Russell, Co-CEO, Shift

Joe Du Bey, CEO, Eden

Thejo Kote, Founder and CEO, Airbase

Sam Corcos, CEO, Levels

Sam Purtill, Co-Founder and CTO, Jyve

Cammy Bergren, Co-Founder and CPO, Jyve

James Kairos, Co-Founder, Jyve

Kyna Fong, Co-Founder and CEO, Elation Health

Ian K. Shakil, Founding Chairman, Augmedix

Vibhu Norby, Founder and CEO, b8ta

Jonathan Downey, CEO, Candidate Labs

Jon Bischke, CEO, Entelo

Robert F. Adler, Co-Founder and CSO, Faraday, Inc.

Jayant Kulkarni, CEO, Quartzy

Bharat Vasan, President, The Production Board

Patricio Echague, Co-Founder and CTO, Split.io

Sheri Huston, CRO, Leanplum

George Garrick, CEO, Leanplum

Andrew First, Co-Founder, Leanplum

Matthew Cooper, CEO, EarnUp

Bryce Galen, Co-Founder & CEO, Zero Financial Inc.

Joel Washington, Co-Founder & COO, Zero Financial Inc.

Husayn Kassai, CEO, Onfido

Curtis Kroeker, COO, Worklete, Inc.